December 4, 2017 VIA

December 4, 2017 VIA EMAIL Ms. Rachel Mincin Associate Chief Accountant Office of the Chief Accountant U.S. Securities and Exchange Commission 100 F Street, N.E Washington, D.C. 20549-6628 RE: Confirmation Letter Related to SIFMA 1 submission entitled Request for Interpretive Guidance on the application of the derecognition rules under Topic ASC 860 to the financial assets transferred in a CMBS issuance using the Third-Party Purchaser Option to comply with the Risk Retention Rule. Dear Ms Mincin: This is to confirm our discussion on November 6, 2017 with the Staff of the Office of the Chief Accountant of the Securities and Exchange Commission (the Staff ) regarding an accounting submission with the title Request for Interpretive Guidance on the application of the derecognition rules under Topic ASC 860 to the financial assets transferred in a CMBS issuance using the Third-Party Purchaser Option to comply with the Risk Retention Rule dated September 13, 2017 (the Submission ). We understand that the Staff s conclusions are based solely on the facts and circumstances provided to the Staff via: (a) the Submission and (b) the conference call held on September 26, 2017. Capitalized terms not defined herein are defined in the Submission. Background In October 2014, the Regulators adopted a final Rule implementing the credit risk retention requirements of the Dodd-Frank Act. Under the Rule, sponsors of issuances of asset-backed securities, including CMBS, are generally required to retain 5% of the credit risk relating to the underlying for a specified period of time. In a CMBS offering, the risk retention requirements may be satisfied in whole or in part by having a Third-Party Purchaser ( TPP ) purchase the Risk Retention Interest. The Rule subjects the TPP to the same requirements to which the Retaining Sponsor would have been subject, including constraints on sale and certain restrictions on hedging and pledging on a non-recourse basis. More background information is contained in the Submission. 1 SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org. New York Washington 120 Broadway, 35th Floor New York, NY 10271-0080 P: 212.313.1200 F: 212.313.1301 www.sifma.org

SEC Staff Position Based on the discussion on November 6, 2017, our understanding of the SEC Staff s position communicated to us is as follows: 1) The Staff does not object to the overall conclusion expressed in the Submission, that derecognition is achieved for the transferors in each of the two fact patterns described on page five (5) of the Submission. Specifically, the restrictions placed on the TPP resulting from the Rule do not cause the transferors to fail to meet the conditions in ASC 860-10-40-5(b) in each of the two fact patterns described in the Submission. 2) The Staff observes that the final Rule (Credit Risk Retention, 79 FR 77602 et seq. (December 24, 2014)) specifically states the intention behind the TPP Option is to balance two overriding goals: (1) Not disrupting the existing CMBS third-party purchaser structure and (2) ensuring that risk retention promotes good underwriting. (79 FR at 77648). The Staff s conclusion is not based on the analysis set forth in Appendix 1- Technical Accounting Analysis of the Submission, but rather based on the unique facts and circumstances described in the Submission that arise from a change in regulation of the securitization market imposed by the Regulators under the Rule and the documented regulatory intent of the TPP Option. The Staff s conclusion should not be analogized to other fact patterns. On behalf of SIFMA s GFI Accounting Committee, I want to thank the SEC Staff for their consideration of this issue. Regards, Mary Kay Scucci, PhD, CPA SIFMA Managing Director cc: Andrew Pidgeon, Professional Fellow, SEC Office of the Chief Accountant Robert Sledge, Professional Fellow, SEC Office of the Chief Accountant Lindsey McCord, Associate Chief Accountant, SEC Division of Corporation Finance Chief Accountant, SEC Division of the Corporate Finance Chief Accountant, SEC Office of the Chief Accountant Timothy J Bridges, Goldman, Sachs & Co, Chair SIFMA Global Financial Institutions Accounting Committee 2

Joanne Wakim, Assistant Director and Chief Accountant, Federal Reserve Rusty Thompson, Deputy Comptroller and Chief Accountant, OCC Bob Storch, Chief Accountant, Division of Risk Management, FDIC John Bishop, Partner, PricewaterhouseCoopers Joseph Cascio, Partner, Ernst & Young Michael Hall, Partner, KPMG John Howard, Senior Partner, Deloitte 3

September 13, 2017 VIA EMAIL Mr. Wesley R. Bricker Accounting Group Interpretations Office of the Chief Accountant U.S. Securities and Exchange Commission 100 F Street, N.E.; Mail Stop 6628 Washington, D.C. 20549 6628 OCARequest@sec.gov Re: Request for Interpretive Guidance on the application of the derecognition rules under Topic ASC 860 to the financial assets transferred in a CMBS issuance using the Third Party Purchaser Option to comply with the Risk Retention Rule Dear Mr. Bricker, The Global Financial Institutions Accounting Committee of the Securities Industry and Financial Markets Association ( SIFMA ) 1 is requesting interpretive guidance from the Office of the Chief Accountant regarding the application of the derecognition rules under ASC Topic 860, Transfers and Servicing. Our specific question relates to the application of ASC 860 10 40 5(b), the transferee s right to pledge or exchange the financial assets transferred in a commercial mortgage backed securities ( CMBS ) issuance using the Third Party Purchaser Option to comply with the risk retention rule (the Rule ), as discussed more fully below. 2 A draft of this letter was shared with our audit firms and their comments were taken into consideration. We ask you to consider the analysis herein limited to the facts as provided, and to confirm that you would not object to the overall conclusion 1 SIFMA is the voice of the U.S. securities industry. We represent the broker dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org 2 Regulation RR, 12 CFR Part 246 issued jointly by the Regulators under Section 15G of the Securities Exchange Act of 1934 (15. U.S.C. 78o 11), as added by section 941 of the Dodd Frank Wall Street Reform and Consumer Protection Act. 1

reached, that derecognition is achieved for the transferors in each of the two fact patterns described on page 4 of this letter. Background Risk Retention Rule In October 2014, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development (collectively the Regulators ) adopted a final Rule implementing the credit risk retention requirements of the Dodd Frank Act. The objective of the Rule is to align the interests of the sponsor of a securitization with its beneficial interest holders by requiring a sponsor to retain a specified percentage of the credit risk of the assets it securitizes. Under the Rule, sponsors of issuances of asset backed securities, including CMBS, are generally required to retain 5% of the credit risk relating to the underlying assets until the latest of: 1) the reduction of the unpaid principal balance of the underlying loans reaches 33% of their original unpaid principal balance as of the securitization cut off date; 2) the reduction of the unpaid principal balance of the issued securities reaches 33% of its original principal balance as of the securitization closing date; or 3) two years after the securitization closing date. A given transaction may have multiple sponsors whereby each transfers loans into the securitization; but only one party may act as retaining sponsor under the Rule (the Retaining Sponsor. ) During the required risk retention period, the Retaining Sponsor and other permitted holders 3 of the risk retention interest ( Risk Retention Interest ) may not transfer the Risk Retention Interest, enter into certain credit hedges, or borrow against the Risk Retention Interest on a non recourse 4 basis. The Risk Retention Interest may be retained as 1) a vertical interest representing an interest in each class of securities issued in the securitization in an amount equal to 5% of the par value of all such classes or a single vertical interest representing a 5% par interest in each tranche, 2) a horizontal interest representing the most subordinate class or classes of securities issued in the securitization in an amount equal to 5% of the fair value of all of the securities issued (determined by using the fair value measurement framework under U.S. GAAP), or 3) any combination of vertical and horizontal risk retention that sums to 5% determined as set forth above, typically referred to as an L shape structure. 3 Generally, certain qualifying originators, and for CMBS, a third party purchaser, as further discussed in this letter. 4 The restriction is limited to full recourse pledging because the intent of the Rule is to ensure that the Retaining Sponsor, or other permitted holder, including the TPP, continues to be subject to the credit risk of the Risk Retention Interest. 2

In a CMBS offering, as an alternative to directly retaining a Risk Retention Interest, the Retaining Sponsor may satisfy the Rule by having a qualified third party purchaser ( TPP ), 5 also known as a B Piece Buyer, purchase the most subordinate class or classes of securities issued in the offering (the B Piece ) in an amount equal to up to 5% of the fair value of all of the CMBS issued in the offering (a horizontal interest or horizontal structure). In the event a TPP does not purchase enough horizontal securities to meet the full 5% fair value requirement, the Retaining Sponsor can utilize an L shape structure to satisfy the 5% risk retention by itself retaining an incremental vertical interest to collectively meet the 5% requirement. We refer to the utilization of a TPP in either a horizontal structure or L shape structure as the TPP Option. The Rule does not permit selling a vertical interest to a TPP. The Regulators specifically provided for a TPP Option as an alternative to the Retaining Sponsor complying with the Rule by directly holding the Risk Retention Interest itself. In developing the Rule, the Regulators recognized that CMBS offerings, which historically relied upon a B Piece Buyer, function differently from other ABS asset classes. CMBS offerings typically have a longer term (i.e., between 5 to 10 years) than other ABS offerings. Without the TPP Option, the longer maturities would result in the Retaining Sponsor amassing a large portfolio of CMBS Risk Retention Interests, making it less attractive for sponsors to provide needed capital to the commercial real estate market. The historical B Piece Buyer in a CMBS offering conducts its own due diligence on all of the loans intended to be securitized. The Rule recognizes that the B Piece Buyer is a sophisticated investor that not only performs extensive due diligence on each loan in the pool, but also takes the first loss position in the pool of loans. The Regulators viewed the B Piece Buyer as satisfying the legislative goal of having a party at risk with so called skin in the game to ensure the loans in the CMBS issuance in which the B Piece Buyer is purchasing the first loss risk position are rigorously underwritten by the originators of those loans and re underwritten by a sophisticated B Piece Buyer. In the event a TPP is utilized to satisfy all or a portion of the 5% risk retention requirement, the Rule subjects the TPP to the same requirements to which the Retaining Sponsor would have been subject to, including constraints on sale and certain restrictions on hedging and pledging on a non recourse basis. 6 The Rule requires that the Retaining Sponsor maintain and adhere to policies and procedures to monitor the TPP s compliance. The Rule does not specify what such policies and procedures should be and does not indicate the penalty for noncompliance (if any). The Retaining Sponsor imposes certain controls in its agreement with the TPP to facilitate monitoring, such as requiring periodic certifications by the TPP of its compliance with the Rule and the right to hold due 5 The Rule allows the Risk Retention Interest to be sold to up to two TPPs, whose respective interests must be pari passu. For purposes of this fact pattern, it is assumed that there is only one TPP. 6 The Retaining Sponsor and the TPP may sell its Risk Retention Interest after 5 years to a subsequent TPP that would be subject to the restrictions under the Rule. 3

diligence meetings with the TPP to monitor compliance. In addition, the Risk Retention Interest held by the TPP may be in certificated form, and held by a third party custodian who is not permitted to release the Risk Retention Interest without the consent of the Retaining Sponsor, which consent may not be unreasonably withheld, delayed or conditioned. Securitization Structure CMBS transactions typically occur through a two step transfer. 7 In the first step, loans are purchased by the Depositor from the Retaining Sponsor and/or other loan sellers. The Depositor is typically a wholly owned subsidiary or affiliate of the Retaining Sponsor and of the Retaining Sponsor s selling entity (if other than the Retaining Sponsor.) The Depositor is legally structured as a special purpose entity. In the second step, the Depositor sells the loans to a newly created common law trust (the Trust ) in exchange for 100% of the pass through certificates backed by those loans. The Depositor sells the non risk retention certificates to an underwriter or initial purchaser or through a placement agent. The underwriter/initial purchaser/placement agent then sells/places the non risk retention certificates to/with third party investors. Through these two steps, the Retaining Sponsor meets the conditions for legal true sale of the underlying loans. The Depositor sells the Risk Retention Interest to either the Retaining Sponsor or to a TPP or both. A Qualifying Originator (i.e., a sponsor that originated 20% or more of the pool of loans) may also purchase a portion of the Risk Retention Interest from the Retaining Sponsor or the Depositor in a percentage proportionate to the collateral it contributes to the transaction, and thereupon becomes subject to the restrictions under the Rule. Derecognition by the Retaining Sponsor The objective of ASC 860 is to determine whether a transferor has surrendered control over a transferred financial asset for purposes of concluding whether it should be derecognized. 8 If control over the transferred financial asset is not surrendered, the transferor continues to recognize the transferred financial asset on its balance sheet and any proceeds received are recognized as a secured financing. When the transferee is a securitization entity, integral to concluding that control has been surrendered is a determination that each third party beneficial interest holder has the right to pledge or exchange its interests under ASC 860 10 40 5(b). Assumptions: In this fact pattern, it is assumed that the Retaining Sponsor is not otherwise required to consolidate the CMBS issuer, legal isolation is achieved (ASC 860 10 40 5(a)), and the Retaining Sponsor does not maintain effective control (ASC 860 10 40 5(c)). We have also assumed that the Retaining Sponsor s ongoing involvement with the CMBS issuer is limited to the requirements under the Rule which includes the agreement between the Retaining Sponsor and the TPP 7 As described in ASC 860 10 55 22. See structure diagram attached as Appendix 2 8 ASC 860 10 40 4 4

described above in compliance with the Rule and which may include holding a vertical Risk Retention Interest. The Retaining Sponsor does not otherwise enter into other contractual relationships with the securitization entity or its beneficial interest holders. 9 For purposes of the accounting analysis, unless otherwise specifically noted, references to the Retaining Sponsor includes all transferors into the securitization such as other loan originators, and is not specific to the Retaining Sponsor as defined by the Rule. Reference to the named Retaining Sponsor refers solely to the Retaining Sponsor as defined by the Rule. Issue: Does the Retaining Sponsor satisfy the condition in ASC 860 10 40 5(b) 10 (hereafter referred to as condition 5(b) or simply 5(b) ) in each of the following fact patterns: 1. A 5% horizontal interest, representing the most subordinated class or classes in the securitization, sold to a TPP 2. An L shape structure which involves a vertical interest held by the Retaining Sponsor and a horizontal interest sold to a TPP; the combination of which makes up the 5% Risk Retention Interest. We note that if the Retaining Sponsor holds the 5% Risk Retention Interest on its balance sheet, it is clear that condition 5(b) is met because the beneficial interest is held by the Transferor rather than by a third party holder. Accounting Analysis and Conclusion: We believe the objective of ASC 860 is met and derecognition is achieved including under condition 5(b) when a Risk Retention Interest is sold to a TPP in a CMBS securitization, using either a horizontal structure or an L shape structure despite the regulatory restrictions that the TPP must observe. Accordingly, derecognition of both the transferred loans and the Risk Retention Interest sold to the TPP is appropriate, based on the facts assumed in this letter. This conclusion is based on the following analysis: First, the TPP controls the Risk Retention Interest by holding legal title and because it has the right to pledge its interest on a full recourse basis. We believe the TPP 9 Limited to the assumptions described above, this accounting analysis considers all arrangements or agreements made contemporaneously with and in contemplation of the transfer consistent with the objectives of ASC 860 10 40 4. 10 ASC 860 10 40 5b states This condition is met if both of the following conditions are met: 1) Each transferee (or, if the transferee is an entity whose sole purpose is to engage in securitization or asset backed financing activities and that entity is constrained from pledging or exchanging the assets it receives, each third party holder of its beneficial interests) has the right to pledge or exchange the assets (or beneficial interests) it received. 2) No condition does both of the following: i.) Constrains the transferee (or third party holder of its beneficial interests) from taking advantage of its right to pledge or exchange ii.) Provides more than a trivial benefit to the transferor (see paragraphs 860 10 40 15 through 40 21). If the transferor, its consolidated affiliates included in the financial statements being presented, and its agents have no continuing involvement with the transferred financial assets, the condition under paragraph ASC 860 10 40 5(b) is met. 5

has the right to all or most of the cash inflows that are the primary economic benefit of the Risk Retention Interest by receiving payments of principal and interest, through its right to pledge on a recourse basis and its right to sell the Risk Retention Interest after the restriction period expires. Moreover, the Retaining Sponsor does not have any control over the Risk Retention Interest. Any right to direct the use of the Risk Retention Interest is outside the control of the Retaining Sponsor. All voting rights and other rights to the cash flows of the Risk Retention Interest reside with the TPP. Second, while the TPP is restricted from exchanging its interest and pledging on a non recourse basis, the restrictions are imposed on the TPP solely to comply with the requirements of the Rule. The restrictions exist whether the Retaining Sponsor retains a portion of the Risk Retention Interest or not, validating the point that it is imposed by the Rule not the Transferor. Further, the Regulators acknowledged that the restrictions under the Rule are regulatory imposed. 11 Therefore, the restrictions under the Rule are not a constraint under condition 5(b). Third, the TPP purchases the Risk Retention Interest at a fair value that takes into consideration any regulatory restrictions of the Rule. That is, the proceeds the Retaining Sponsor receives are discounted because the Risk Retention Interest is restricted. The Rule was enacted to benefit and protect the third party investors in a securitization, not to provide a benefit to the Retaining Sponsor. Further, as described in the background section, the TPP historically has been the investor in the B Piece and the restrictions imposed by the Rule are not inconsistent with its general investment strategy. Therefore, we do not believe the restrictions under the Rule provide more than a trivial benefit to the Retaining Sponsor. Finally, the Retaining Sponsor derives no ongoing monetary benefit from the Risk Retention Interest sold to the TPP or any further control over the transferred assets. While the Retaining Sponsor may have continuing involvement in the cash flows of the transferred loans in an L shape structure, there is no continuing involvement in the cash flows of the Risk Retention Interest sold to the TPP. Summary Conclusion: There are multiple independent paths to a conclusion that condition 5(b) does not preclude derecognition of the loans sold into the securitization and the Risk Retention Interest sold to a TPP (under either the full horizontal structure or the L shape structure.) Appendix 1 sets forth each of these arguments, each of which individually supports a conclusion that condition 5(b) is met. While we acknowledge that some may give more or less weight to each of the arguments, we 11 In the final Rule, the Regulators responded to an accounting inquiry as to whether the regulatory restrictions imposed on the third party holders including a TPP creates a de facto agency relationship between the Retaining Sponsor and the TPP when analyzing for consolidation of the securitization. The Regulators concluded that the restrictions do not create a de facto agency relationship for purposes of the consolidation analysis because they are regulatory imposed. 6

collectively believe that it is appropriate to conclude, that the Retaining Sponsor has surrendered control as contemplated by ASC 860 over the transferred loans and Risk Retention Interest post securitization using a TPP Option in both a horizontal and a L shape structure, notwithstanding the regulatory restrictions imposed on the Risk Retention Interest. We believe it is important to emphasize that an alternative conclusion, namely that using the TPP Option results in a failed sale for the Retaining Sponsor, leaves the Retaining Sponsor with the anomalous position of recognizing more assets on its balance sheet as a result of a sale of the Risk Retention Interest to the TPP than would be recognized if it held the Risk Retention Interest directly. This is because, absent the use of the TPP Option, the Retaining Sponsor would achieve derecognition of the transferred loans 12 and would only recognize on its balance sheet the Risk Retention Interest. We believe, as an unintended consequence, if this alternative view were to be applied, the TPP Option would no longer be the effective tool intended by the Regulators to be used by sponsors of CMBS to free up capital so that they can continue to provide liquidity to the commercial real estate market, while still meeting the objectives of the Rule. As described in the background section, the Rule provides the TPP Option as an accommodation for the unique aspects of the CMBS market. In this unique fact pattern, the TPP effectively serves in the same or similar capacity as the Retaining Sponsor, which is why a TPP is deemed to satisfy the objectives of the Rule. In essence, the Rule acknowledges that the TPP is different from the remaining investors in the securitization. The Risk Retention Interest is determined during the structuring phase of the securitization and the TPP is significantly involved in shaping the loan portfolio stemming from the due diligence it performs on the credit risk of the proposed loan pool. Given the role the TPP fulfills, as a special accommodation under the Rule, we believe it is important to analyze condition 5(b) in the context of the objectives of the Rule. We thank you in advance for your consideration of this matter. We would be happy to discuss this request for interpretive guidance with you at your convenience. Please contact Mary Kay Scucci at 212 313 1331 if you have questions or comments concerning our letter. Regards 12 As noted above, condition 5(b) applies to third party beneficial holders which does not include the Retaining Sponsor. 7

Mary Kay Scucci, PhD, CPA Securities Industry and Financial Markets Association cc: Timothy Bridges Chairman, SIFMA Global Financial Institutions Accounting Committee 8

Appendix 1 Technical Accounting Analysis Summary of assumptions underlying the fact pattern: The objective of ASC 860 is to determine whether a transferor has surrendered control over the transferred financial assets. The focus of the technical analysis below is on ASC 860 10 40 5(b). For purposes of this analysis, it is assumed that the Retaining Sponsor is not otherwise required to consolidate the CMBS issuer, legal isolation is achieved (ASC 860 10 40 5(a)), and the Retaining Sponsor does not maintain effective control (ASC 860 10 40 5(c)). We have also assumed that the Retaining Sponsor s ongoing involvement with the CMBS issuer is limited to the requirements under the Rule which includes the agreement between the Retaining Sponsor and the TPP described above in compliance with the Rule and which may include holding a vertical Risk Retention Interest. The Retaining Sponsor does not otherwise enter into other contractual relationships with the securitization or its beneficial holders. 13 ASC 860 10 40 5(b) states This condition is met if both of the following conditions are met: 1) Each transferee (or, if the transferee is an entity whose sole purpose is to engage in securitization or asset backed financing activities and that entity is constrained from pledging or exchanging the assets it receives, each third party holder or its beneficial interests) has the right to pledge or exchange the assets (or beneficial interests) it received. 2) No condition does both of the following: i. Constrains the transferee (or third party holder of its beneficial interests) from taking advantage of its right to pledge or exchange. ii. Provides more than a trivial benefit to the transferor (see paragraphs 860 10 40 15 through 40 21). If the transferor, its consolidated affiliates included in the financial statements being presented, and its agents have no continuing involvement with the transferred financial assets, the condition under paragraph ASC 860 10 40 5(b) is met. Questions 1 3 should be read under an assumption that the Retaining Sponsor (transferor) has continuing involvement 14 in the transferred financial assets. However, there is a question on whether the Retaining Sponsor (transferor) has continuing involvement which is discussed in Question 4. Question 1: As described in the background section above, the TPP is able to pledge on a full recourse basis but is constrained from pledging on a nonrecourse basis or exchanging the Risk Retention Interest it purchased. Is condition 5(b) met? 13 Limited to the assumptions described above, we considered all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, thereby satisfying the objective and requirements of paragraph 860 10 40 4. 14 As defined in the Master Glossary. 9

Conclusion: Yes. We believe condition 5(b) is met where the transferee has the right to pledge or exchange a transferred asset. While the TPP is prohibited from selling its Risk Retention Interest as prescribed by the Rule, the TPP is free to pledge it on a recourse basis, subject to the approval of the Retaining Sponsor, which approval shall not be unreasonably withheld, conditioned, or delayed. The approval of the Retaining Sponsor is required in order to monitor the TPP s compliance with the Rule. ASC 860 10 55 27 clarifies that in a transaction where the transferee is precluded from exchanging the transferred asset but has the ability to pledge, the determination of whether condition 5(b) is met depends on the facts and circumstances. The FASB Accounting Standards Codification does not explicitly define the term pledge within its Master Glossary, but it provides background information on a pledge and defines the related terms security interest and collateral within ASC 860. ASC 860 30 05 3 notes that if collateral is transferred to the secured party, it is commonly referred to as a pledge. ASC 860 30 05 2 notes that a debtor may grant a security interest in certain assets to a lender to serve as collateral for its obligation under a borrowing, with or without recourse to other assets of the obligor. As condition 5(b) does not limit pledge to recourse or non recourse financing and ASC 860 discusses pledging more broadly, we believe it is more appropriate to consider the facts and circumstances of the transaction in determining whether condition 5(b) is met. We do not believe it is appropriate to conclude that the term pledge in condition 5(b) is intended to be limited to nonrecourse financings. Condition 5(b) is written from the perspective of the transferee; however, conceptually the condition represents an assessment of who has control over the transferred asset. Specifically, for securitization entities, the 5(b) analysis focuses on whether the third party beneficial interest holders have obtained control over their beneficial interests, as opposed to whether the transferee has obtained control over the transferred financial assets. That is, if the transferee (or third party beneficial interest holder) has the right to pledge or exchange the transferred financial asset, then control resides with the transferee. If the transferee does not meet this condition, then the assumption is that control has not been relinquished by the transferor. We believe that the Retaining Sponsor does not have control over the TPP s Risk Retention Interest because it is unable to make decisions on monetizing the transferred asset, including the decision to pledge or exchange it outside of the regulatory restrictions. The Retaining Sponsor s interaction with the Risk Retention Interest is limited to monitoring compliance with the TPP provisions of the Rule and is unrelated to controlling the economic benefits of the asset. Paragraph 169 of SFAS 140 Basis for Conclusions states that the right to pledge or exchange is important in considering whether the transferee controls the financial asset because through this right, the transferee can obtain all or most of the cash 10

inflows that are the primary economic benefits of the asset. The TPP can benefit from the cash inflows of the Risk Retention Interest by pledging it on a recourse basis. Furthermore, the pledge restriction does not provide the Retaining Sponsor with control over the future economic benefits of the Risk Retention Interest. During the period that the TPP is subject to the restrictions under the Rule, the TPP is entitled to all of the benefits of ownership, including collecting payments of principal and interest or other cash flows on the Risk Retention Interest, as well as the benefit of exercising controlling rights which is typically embedded in the tranche purchased by the TPP. Furthermore, we believe it is important to consider market conventions for obtaining collateralized financing. General market practice is to finance CMBS securities using repurchase agreements (e.g., a SIFMA Master Repurchase Agreement). These agreements are generally recourse financings. As stated in paragraph 161 of the FAS 140 Basis for Conclusions, a transferee may be able to use a transferred asset in some of those ways but not in others. Therefore, establishing criteria for determining whether control has been relinquished to a transferee necessarily depends in part on identifying which ways of using the kind of asset transferred are the decisive ones. Thus, we believe that the TPP s right to pledge the Risk Retention Interest on a recourse basis is established as a decisive way of controlling the transferred asset; therefore, condition 5(b) is met. We note that the repo financing market for all risk retention interests, including the Risk Retention Interests held by a TPP, is still developing and currently there is no liquid market available to finance these Risk Retention Interests. However, ASC 860 10 40 18(e) explicitly states that market illiquidity alone would not constrain the transferee. For the reasons stated above, we believe that the TPP controls the Risk Retention Interest which is reflected in the TPP s important rights to receive the cash inflows through its right to pledge on a recourse basis, and sell its interest after the sunset provisions expire. Therefore, we believe condition 5(b) is met. Alternative View: No. The ability to pledge as referenced in condition 5(b) requires that the transferee have the ability to pledge on a recourse and non recourse basis. Proponents of this view note that under ASC 860 10 55 27 a transferee that is precluded from exchanging the transferred asset but has the unconstrained right to pledge, should consider facts and circumstance on whether condition 5(b) is met. Since the paragraph refers to the unconstrained right to pledge, proponents of this view argue that the ability to pledge on a recourse only basis would fail condition 5(b). Opponents to this Alternative View note that condition 5(b) explicitly states that the transferee must be able to pledge or exchange. Furthermore, paragraph 169 of the Basis for Conclusions for SFAS 140 states The Board revisited the exchange or pledge question and again in developing this Statement concluded that the criterion in paragraph 9(b) is inclusive: it is the ability to obtain all or most of the cash inflows, 11

either by exchanging the transferred asset or by pledging it as collateral. Therefore, there is support in the literature to be able to monetize the asset only through a pledge in order to meet condition 5(b). Since the right to pledge on a recourse basis demonstrates the transferee s control over the transferred asset, opponents of the Alternative View believe the condition 5(b) is met. Proponents of this Alternative View also believe that to substantiate an assertion that the TPP can obtain all or most of the cash inflows that are the primary economic benefits of the asset, the TPP must be able to obtain at least 90% of the fair value of the Risk Retention Interest (i.e., the haircut is 10% or less) by pledging it under a financing. The rationale behind the concept in condition 5(b) as discussed above focuses on the ability of the TPP to monetize the Risk Retention Interest. In this case, the TPP is unable to monetize the Risk Retention Interest through an outright sale. Accordingly, proponents of this view argue that the financing should provide a cash inflow (proceeds) to the TPP equal to at least 90% of the Risk Retention Interest s fair value to meet the all or most threshold. Opponents to this Alternative View argue that condition 5(b) does not require the amount of the haircut to be 10% or less in order to demonstrate that the transferee has the right to obtain all or most of the cash inflows of the transferred asset. Additionally, using a 90% proceeds test yields results that are inconsistent with the control principle of ASC 860. ASC 860 is based on the concept of control rather than risk and rewards. Thus, condition 5(b) is framed around the transferee s rights to pledge or exchange and therefore, the more appropriate assessment is whether the TPP is restricted from exercising a decisive right 15 that reflects the transferee s control over the asset. The TPP holds legal title to the Risk Retention Interest and has the right to obtain all or most of the cash inflows through its ability to pledge on a recourse basis; therefore, opponents of the Alternative View believe that the TPP has control over the Risk Retention Interest and condition 5(b) is met. Further, if the TPP s interest is considered in isolation, the proceeds received in either a recourse or non recourse financing of the Risk Retention Interest will likely reflect a haircut greater than 10%. This is not an indicator that the TPP does not have control over the Risk Retention Interest or is unable to monetize its cash inflows. Rather, the size of the haircut is a reflection of the credit riskiness and liquidity of the asset. Historically, when B Piece buyers pledged their investments, these pledges were under industry standard repurchase agreements and were full recourse. Even without the Rule, Risk Retention interests would be pledged under these same industry standard repurchase agreements and the repurchase counterparties would expect full recourse. We do not believe there would be a significant difference in proceeds received between pledging a Risk Retention Interest on a full recourse basis and pledging a similar B Piece interest that is not subject to the Rule. Further, the haircut on a full recourse financing is also a product of the other assets that the lender has recourse to and the credit rating of the 15 As described in paragraph 169 to the Basis for Conclusions of SFAS 140 12

borrower. For example, the haircut will be impacted if there are a significant number of high quality assets that the lender has recourse to beyond foreclosing on the Risk Retention Interest. By applying a 90% proceeds test to condition 5(b), the Alternative View introduces a co mingled perspective that includes other variables and does not isolate the assessment of the specific transferred asset. We also note that the accounting guidance in ASC 860 10 40 18(e) highlights that illiquidity should not be a factor in determining whether 5(b) is met. Therefore, using a haircut threshold to assess whether 5(b) is met runs counter to the illiquidity guidance. In summary, the amount of proceeds received in a financing does not reflect the TPP s right to pledge or inhibit the TPP from exercising control over the Risk Retention Interest. The amount of the haircut reflects the lender s perceived risk of loss from an asset falling in value with riskier types of assets, such as the lowest rated tranches of a securitization, requiring a steeper haircut. If the haircut is considered in assessing condition 5(b), then riskier assets will be held to a different accounting standard than other types of assets that typically do not require a large haircut. With the exception of very high quality assets such as U.S. Treasuries, in effect, this Alternative View appears to us to be inconsistent with the Board s stated intent in paragraph 169 of the Basis for Conclusions for SFAS 140 that condition 5(b) can be met either through pledge or exchange. Opponents note that the condition in 5(b) should instead continue to focus on whether the transferee has the right to pledge, not on whether the pledge is recourse or non recourse or the percentage of fair value that can be raised. Supporters of the conclusion in Question 1 believe no further analysis is needed and derecognition is achieved for the Retaining Sponsor. Proponents of the Alternative View of Question 1 would then need to consider Question 2. Question 2 Is a restriction considered a constraint for purposes of condition 5(b) when the restriction is imposed by regulation? Conclusion: No. ASC 860 10 40 15 notes that judgment is required to assess whether a particular condition results in a constraint. ASC 860 10 40 18(d) 16 clarifies that a constraint imposed by a regulatory limitation would not be considered a transferor imposed constraint under condition 5(b). The Rule gives rise to the restriction on the TPP s ability to sell its Risk Retention Interest. While this regulatory constraint is contractually passed from the Retaining Sponsor to the TPP, it is a constraint that is imposed by law and regulation. The restrictions exist whether the Retaining Sponsor retains a portion of the Risk Retention Interest or 16 ASC 860 10 40 18 provides a list of conditions that would not constrain a transferee from pledging or exchanging a transferred financial asset including: (d) a regulatory limitation such as on the number or nature of eligible transferees (as in the circumstance of securities issued under Securities Act Rule 144A or debt placed privately) 13

not, validating the point that it is imposed by the Rule and not the transferor. We note that in the final Rule, the Regulators specifically noted (in response to questions raised on whether transfer restrictions that the Rule imposes created a de facto agency relationship between it and other third party beneficial interest holders for purposes of consolidation analysis under ASC 810) that a de facto agency relationship does not exist solely as a result of a regulatory restriction imposed on an investor that prohibits its ability to transfer, sell, or otherwise encumber its interest in an entity. We believe the Regulators acknowledgement that the transfer restriction results from regulatory restrictions makes it clear that the restrictions are not transferor imposed and therefore should qualify such restriction as a regulatory limitation that is not a constraint as contemplated by ASC 860 10 40 18(d). Alternative View: Yes. While the Rule provides the Retaining Sponsor with the ability to use a TPP as a means of compliance, and proponents of this view agree that regulatory limitations should not presumptively be considered constraints, analogy of the risk retention requirements to the regulatory limitations in ASC 860 10 40 18(d) is not believed to be appropriate. In a 144A offering, while the types of investors are limited to qualified investors, there are a sufficient number of qualified investors that do not result in a transferee effectively being constrained in its ability to pledge or exchange the transferred financial assets and, thereby, realize the full economic benefit of the transferred asset. Accordingly, proponents of this view believe that regulatory restrictions must still be evaluated to determine if they constrain the holder of the beneficial interest from monetizing its interest and also provide more than a trivial benefit to the transferor. 17 Opponents to this Alternative View believe that the regulatory limitation in 860 10 40 18(d) is not restricted only to those that limit the number or nature of transferees. It only uses such fact pattern as an example of a regulatory limitation which may have been the only example at the time the standard was written. Additionally, as noted in the Conclusion above, the Regulators have acknowledged the difference between restrictions imposed by an agreement between parties and regulatory restrictions in the context of an accounting analysis. This counters the Alternative View that the restrictions on the TPP as a result of the Rule should be deemed to be imposed by the transferor for accounting purposes and supports the view expressed in the Conclusion that regulatory restrictions should not be viewed as a constraint under condition 5(b). Further, they believe the Alternative View deviates from the principle set out in ASC 860 10 40 15, which requires a judgment based on the considerations of all conditions collectively and taking into account all relevant facts and circumstances of the transaction as discussed under the conclusion above. 17 This is supported by ASC 860 10 40 16 which says a condition not imposed by the transferor that constrains the transferee may or may not provide more than a trivial benefit to the transferor. 14

Supporters of the conclusion in Question 2 believe no further analysis is needed and derecognition is achieved for the Retaining Sponsor. Proponents of the Alternative View of Question 2 would then need to consider Question 3. Question 3 Do the constraints placed on the TPP provide the Retaining Sponsor more than a trivial benefit? Conclusion: No. The Retaining Sponsor (as the transferor or one of the transferors) does not obtain more than a trivial benefit from the restrictions the Rule puts on the Risk Retention Interest transferred to a TPP. Based on the requirements of the Rule, in order for the Rule to be satisfied through a TPP option, the TPP that purchases and holds a Risk Retention Interest for its own account must follow the requirements of the Rule. The restrictions are structural requirements imposed by the Rule intended to benefit the non sponsor investors in a CMBS deal rather than the Retaining Sponsor or the TPP. We note that all parties (i.e., all investors, sponsors, administrative agents, custodians, and issuers etc.) to a CMBS transaction are aware of the restrictions. Therefore, we do not believe it is appropriate to presume that such restrictions provide more than a trivial benefit to the transferor. As further described in the background section, the B Piece Buyer (now the TPP) was generally the standard market investor in the bottom class of a CMBS issuance before the Rule was enacted and would generally hold these investments to maturity and pay for the right to control certain major decisions with respect to the underlying loans of the CMBS. Typically, the TPP as investor in the the Risk Retention Interest continues to hold the role of the controlling class of the CMBS issuance, which among other rights, allows the TPP to determine the course of action in dealing with troubled loans. The exercise of these rights can have a major effect on the performance of the B Piece and the Retaining Sponsor has no rights to prevent or affect in any way the TPP s exercise of its controlling class or other voting rights. Therefore, the restrictions imposed by the Rule are not inconsistent with the TPP s general investment strategy and clearly are not imposed to provide a benefit to the Retaining Sponsor. Finally, it is important to consider that the Retaining Sponsor does not have control and does not receive benefits of ownership in the Risk Retention Interest, as the Retaining Sponsor receives only cash in return for the transferred financial asset and does not retain any economic benefit in the Risk Retention Interest or receive any economic benefit from the restrictions the Rule puts on the Risk Retention Interest purchased by the TPP. The Risk Retention Interest is sold to the TPP at fair value at a price that reflects a discount for the restrictions required to comply with the Rule along with the value associated with holding the right to being the controlling class holder. Alternative View: 15

Proponents of this view believe that a trivial benefit should be defined very broadly to include the provision in the Rule that prohibits selling or pledging a transferred financial asset and presumptively provides the named Retaining Sponsor with more than a trivial benefit. As such, it could be viewed that the named Retaining Sponsor is presumed to receive more than a trivial benefit from the sale of the Risk Retention Interest based on the following: (i) compliance with the Rule is a more than trivial benefit to the named Retaining Sponsor; (ii) the named Retaining Sponsor does not have to retain the Risk Retention Interest on its balance sheet which would incur costs (e.g., capital charges); (iii) the monitoring of the TPP allows the named Retaining Sponsor to know who is the holder of the Risk Retention Interest; and (iv) the risk retention restrictions required by the Rule are documented as a contractual arrangement between the named Retaining Sponsor and the TPP and therefore do not appear to be regulatory imposed. Certain proponents of this view also believe that if the Retaining Sponsor has any other continuing involvement in the Trust, it is presumed that the any constraint provides more than a trivial benefit. They believe that this is implied because ASC 860 10 40 16A clarifies that if there is no continuing involvement than condition 5(b) is met. Opponents to this Alternative View believe that transferors to CMBS transactions have not historically imposed any constraints on selling or pledging the B Pieces, presumptively demonstrating that such constraints were not deemed valuable to the transferors. In fact, if anything, the restrictions are a detriment to the Retaining Sponsor because they have no economic or other reason to restrict the TPP (absent the Rule) and the restrictions reduce the proceeds received on sale of the Risk Retention Interest. Moreover, as described in the Conclusion, the Rule was put in place to protect the investors in the securitization not to benefit the Retaining Sponsor. Supporters of the conclusion in Question 3 believe no further analysis is needed and derecognition is achieved for the Retaining Sponsor. Proponents of the Alternative View of Question 3 would then need to consider Question 4. Proponents of the Alternative View of Question 3 believe that further analysis is necessary to determine whether the Retaining Sponsor has continuing involvement with the transferred financial assets. This analysis considers whether the CMBS transaction is one transfer of recognized financial assets (namely, the Retaining Sponsor s transfer of the loan collateral to the securitization trust) or, alternatively, whether the securitization should be considered to consist of two transfers that each warrant separate analysis under ASC 860, namely (i) the Retaining Sponsor s transfer of the loan collateral to the Trust, and (ii) the Retaining Sponsor s transfer of the Risk Retention Interest to the TPP. This unit of analysis issue is important because the extent and nature of the Retaining Sponsor s ongoing involvement with the transferred loan collateral versus the Risk Retention Interest could be different. 16